Oracles are the backbone of DeFi because they allow conventional financial tools to be built on permissionless and censorship-resistant blockchains. At the heart of it all, smart contracts alone do not have the ability to pull data directly from sources outside of the blockchain (off-chain data). Oracles are working implementations for sharing information originating outside the blockchain with smart contracts in a permissionless and censorship-resistant manner. For instance, oracles can relay the price of oil traded on the CME futures exchange, thereby allowing protocols to create synthetic assets that track the price of oil. Oracles are crucial to the lending and borrowing markets as well, as they’re responsible for relaying asset collateralization data to the automated systems. Oracles are not just limited to feeding pricing data but are also capable of feeding data pertaining to live events. Prediction markets use oracles to facilitate speculators’ bets on real-world events. Will Trump win the 2024 election? Will the FED raise interest rates by more than 50 bps this month? Who will win the World Cup this year?
Oracles have limitless potential in the blockchain world because of how important it is for blockchains to interact with data that sits outside of the blockchain ecosystem. SYNTHR too will require truly decentralized oracles to be fully censorship-resistant, especially since some of the oracle services available today are centralized. Data feeds are intermediated by third parties known as validator operators. These operators manage validator nodes for a particular oracle service. Such oracle service providers can be Chainlink, Band Protocol, Tellor, or UMA’s Optimistic Oracle. Although each oracle service is unique, the underlying infrastructure is similar. Protocol node operators run validator nodes that pull data from external APIs and then push this data to smart contracts. Validator nodes are incentivized using reward tokens to provide accurate data. Providing incorrect data results in penalties in the form of rewards being slashed.
Since most oracle services are operated by a small number of validators, they can be manipulated or censored. Additionally, the SEC or the CFTC can legally force independent node operators to stop providing data feeds to prevent users from using certain protocols. To prevent censorship and manipulation of oracles, SYNTHR will only use truly decentralized oracle services to ensure a censorship-resistant and trustless DeFi ecosystem.
- 1.On-Chain and Off-Chain Assets
The most common application of oracles is to provide pricing information for on-chain assets to various DeFi protocols. Decentralized lending and borrowing protocols like AAVE rely on Chainlink oracles to feed their smart contracts with the price of BTC from Coinbase, Binance, and CME Bitcoin Futures. Aggregating pricing information is important to deter manipulation. When users stake ETH and mint syUSD, oracles will be used to fetch current ETH prices to determine how much syUSD can be minted as per C-Ratio. SYNTHR will also require oracles to prevent insolvency. The protocol will determine the C-Ratio of CDPs using pricing information given by oracles. When liquidations occur, oracles will again be used to determine the amount of debt to be paid off by the Stability Pool. Oracles will also be responsible for overseeing cross-chain CDPs for the effective functioning of the NuclearPort module. Oracles will also be used to price and mint off-chain syAssets. For instance, to successfully price and mint syXAU, oracle validator nodes will be required to provide the price of gold from major derivative exchanges such as CME, COMEX, and ICE clearinghouses.
In conclusion, oracles can be used for all financial assets, even those that are heavily regulated, such as stocks, currencies, bonds, ETFs, and commodities. However, because these assets are highly regulated, optimistic oracles may be used to avoid forced de-listing as a result of regulator intervention.
2. Debt Pool Tracking
SYNTHR will use oracles to track the size of the Global Debt Pool as a sum of all assets issued across chains. This value will then be used to calculate the user’s debt based on the Debt Pool Shares owned. These oracles will form the foundation for the cross-chain functionality of syAssets.
Individual syAsset debt will be tracked as the summation of the total amount of syAsset issued across various chains multiplied by its current market price.
Where N is the total issuance of syAsset on chain j